Chap. 1 - Economics Flashcards
What is Economics?
Economics studies the decisions people make. With each decision we face trade offs - since something must be sacrificed or given up whenever a choice is made. Scarcity is the reason why we must make decisions; we have unlimited needs and wants but only limited time, money, and other resources.
In a market economy, price reflects what?
The scarcity of a good or service. If at a zero price, the quantity demanded exceeds the quantity supplied, then the good or services is said to be scarce. In a market economy for traded goods and services, the more scarce the item the higher the price.
What are the 5 guidelines to thinking like an economist?
- Every decision has trade-offs.
- Individuals rationally pursue self-interest and respond to incentives.
- In order to make rational decisions, relevant opportunity costs must be identified.
- Compare the marginal benefits to the marginal costs.
- Consider the secondary effects.
What is opportunity cost?
Opportunity cost is the highest value trade-off–the value of the next best option foregone.
Costs can be broken down into two broad categories, what are they? Define them.
- Explicit and Implicit costs.
- An explicit cost is an out-of-pocket monetary expense for use of a resource owned by someone else.
- An implicit cost is a foregone opportunity cost to the owner of the resource.
Your family is taking week long summer vacation at a cabin in the mountains next to a lake. You have been able to get time off work at the job where you normally work 40-hours a week at $12 per hour. Your parents are paying $1,500 for the cabin rental and each child will pay $200 for food and other related costs. You currently have your own rented apartment with a monthly rent of $300 and typically pay $75 per week for food. The travel cost to get to the cabin and back will cost you $50 more than your usual weekly travel expenses. What are the Explicit and Implicit costs?
Explicit Costs
$200 - $75 + $50 = $175
Implicit Costs
Foregone earnings from work: $480
What does the term marginal mean?
Additional
What is Marginal Benefit?
The additional benefit (e.g., the increase on a test score from studying one more hour; the additional return from producing one more unit of output; or investing an additional dollar).
What is Marginal Cost?
The additional cost of undertaking an activity. The Marginal Cost measures the additional value of what has to be sacrificed or given up.
When making decisions Marginal ______ should be compared to Marginal _______.
Marginal Benefit compared with Marginal Cost.
As long as the marginal benefit is greater than or equal to the marginal cost, then the choice would be rational.
What is the Law of Diminishing Marginal Returns?
As more units are consumed, the marginal benefit from an additional unit will eventually decline.
What is Increasing Marginal Cost?
The marginal cost typically increases as more of something is undertaken. As additional units are produced, the cost per additional unit will eventually rise.
What is Microeconomics?
Microeconomics focuses on the one. The behavior and decisions of an individual, firm, industry, or market and the resulting impact on the prices of specific goods, services, and resources.
What is Macroeconomics?
Macroeconomics focuses on the economy as a whole and the behavior of aggregate sectors such as consumers, businesses and government. Inflation, unemployment, and the business cycle are macroeconomic topics.
What is the Law of Demand?
It states that as the price of a good increases, the quantity demanded decreases and as the price of the good decreases, the quantity demanded increases.
